Why On-Chain Matters
Part 4 of 4. As previously detailed, blockchain-native investment strategies provide great benefits to investors and fund managers. Today this primarily applies to crypto assets, but as more non-digital assets become tokenized, they will also become available on-chain. When these advantages begin to overshadow recent negative news from the crypto ecosystem, these strategies should become more prevalent.
Recent crypto failures exposed outright fraud and potentially criminal activities in the ecosystem, which on-chain strategies avoid. FTX is just one example. Customers who trusted the FTX platform had no visibility into how their assets were stored or used as collateral for leveraged activities. Other examples include Celsius and 3AC. The old saying “don’t trust—verify” is now relevant than ever.
This type of fraudulent activity is not limited to crypto investments. In traditional financial (TradFi) markets, similar fraudulent and criminal activities occur. TradFi markets also exhibit lack of transparency and visibility. Auditing and accounting in these investment firms requires trust between the firm and its third-party auditor. There is no way for the investor to verify the transactions and assets being held in their name.
Key features of a blockchain native investment strategy include transparency and visibility of digital assets—this is easily accomplished by using publicly-available tools like blockchain explorers such as Etherscan and Bitcoin Explorer. Additional benefits include immutability of blockchain transactions, public auditing, accounting of digital assets stored on the blockchain, and a complete transaction history.
One positive outcome of recent crypto collapses is a new concept called Proof-of-Reserves (PoR), an attempt by the industry to provide more transparency and visibility into CEX assets. One downside to this method is that the PoR “audit” is basically a snapshot in time that is published; however, this is not the same as being able to see the entire transaction history of a digital asset as is possible with a blockchain explorer. Regardless, PoR is a great step forward.
As more physical assets become tokenized (such as real estate), they will also be visible and transparently tracked on a blockchain. It is becoming more apparent that the tokenization of physical assets, while in its infancy, appears inevitable—this is the way forward.
To wrap up this blog series, on-chain investment should be the foundational strategy upon which other pillars will be added. The pros and cons of CEX and DEX platforms must be considered, and self-custody of assets is a critical enabler for taking personal control and responsibility of digital investments.
Our 4-part blog series on Why On-Chain Matters:
Why On-Chain Crypto Investments Are Superior to Traditional Crypto Investments
Decentralized Exchange (DEX) vs. Centralized Exchange (CEX)
